Audit Chapter 6

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CHAPTER 6
Audit Evidence

|Learning Check |

6-1. a.Audit evidence is all the information used by the auditor in arriving at the conclusion on which the audit opinion is based. Audit evidence includes (1) the accounting records underlying the financial statements and (2) other information that corroborates the accounting records and supports the auditor’s logical reasoning about fair presentation in the financial statements.

b.Any information that is obtained by the auditor to arrive at conclusions on which the audit is based is audit evidence. Information obtained while performing risk assessment procedures supports many important audit conclusions. Hence, this is important audit evidence and needs to have the traits of sufficient, competent evidence. In many cases the auditor uses knowledge and information from the prior year to make preliminary risk assessments. However, the auditor usually updates those conclusions with additional evidence from the current year.

6-2. a.Accounting records generally include the records of initial entries and supporting records. For example accounting records would include: • Checks and records of electronic funds transfers, • Invoices,

• Contracts,
• The general and subsidiary ledgers,
• Journal entries, and other adjustments to the financial statement that are not reflected in formal journal entries, • Records such as worksheets and spreadsheets supporting cost allocations, computations, and reconciliations, and • Disclosures.

b.Example, accounting records associated with the sales and collections cycle might include:

• Sales orders
• Bills of lading and other shipping documents
• Sales invoices
• The sales journal
• A remittance advice
• A prelisting of cash receipts
• Deposit slips
• The cash receipts journal

c.Accounting records alone do not provide sufficient evidence on which to base an audit opinion on the financial statements. The auditor must corroborate information in the accounting records with other sources of evidence such as confirmation from third parties, the auditor’s own observation, tests of controls, and information obtained through other audit procedures.

6-3.a. Other information includes evidence such as:

• Minutes of meetings,
• Confirmation from third parties,
• Analysts’ reports,
• Comparable data about competitors (benchmarking), • Internal control manuals,
• Information obtained through audit procedures such as inquiry, observation or inspection of records or documents, and • Information developed by the auditor that permits the auditor to reach a conclusion through valid logical reasoning.

b. Other information that is relevant to the sales and collections cycle might include:

• Confirmation of third parties.

• Inquiry and observation about internal controls.

• Inspection of documents that have been validated externally such as a bill of lading, a remittance advice, or a deposit slip.

• Inspection of collection history for slow paying clients.

• Bank statements.

6-4. a.The five assertions for fixed assets can be stated as follows:

• All fixed assets exist and recorded fixed asset transactions actually occurred during the accounting period.

• All fixed assets (including capital leases) are recorded.

• The entity has rights to recorded fixed assets and the obligations associated with fixed assets are the obligations of the entity.

• Fixed assets are properly valued in the financial statements.

• Information about fixed assets is properly presented and disclosed in the financial statements.

b.The transaction class audit objectives for fixed assets can be stated as follows:...
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